While some of the rise in gas prices can be blamed on hurricane-related supply disruption, regulatory burdens play an even bigger role.

Hurricanes Harvey, Irma, and Nate highlighted the exposure to life and property all along the Gulf Coast. Of the critical national assets that took a hit, the crux of the U.S. refining industry suffered dramatically. As a result of Harvey alone, twenty refineries in the 300 miles between Corpus Christi and Beaumont were forced to shut down or dramatically reduce rates. The spot price of ultra-low sulfur diesel (ULSD) promptly increased by 10%, while that for gasoline and jet fuel increased by 25%. All three prices remain about 10% higher than before the hurricanes, in part due to regulatory constraints that extend the duration of such price disturbances and highlight the challenges facing the aging American refinery fleet.

In 1982, there were 301 operational U.S. refineries. There are 141 today, and several of them were first commissioned in the 19th Century. Over the same period, domestic operating capacity has increased slightly, from 17.9 to 18.6 million barrels per day. Today, forced-shutdown events like that from a Harvey constitute more than 10% of domestic refining capacity. The remaining mega-refineries involve multiple processing units that are highly integrated, which makes it challenging to come to a coordinated, complete stop. The same can be said of re-starting, with an intermediate period on both sides where off-spec material is generated. How did we get here?

Regulatory Burdens

Both the paucity and the complexity of the American refinery fleet are largely the result of the increasing regulatory stringency placed on motors and motor fuels. Take sulfur, for just one example. In 2000, the Tier 2 Gasoline Sulfur program placed limits on the sulfur content in gasoline. This was done so that by 2004 additional requirements could be placed on vehicles to use advanced emission control systems, the catalyst for which the sulfur would deactivate. Like for the gasoline vehicle fleet, the sulfur content of diesel has been gradually reduced, and reached 15 parts per million (ppm) in 2007, such that newer-model diesel engines are now required to have emissions-reduction technology. Most recently, the implementation of the Tier 3 program at the beginning of this year has seen the sulfur content of gasoline drop to a maximum of 10 ppm. As a result, while the price of oil has been stable, even before Harvey, the weekly average price of retail gasoline was 20% higher as compared to the same period last year.